South Africa’s house prices are now rising again, after six lacklustre years.

The house price index for medium-sized houses rose by 8.8% during the year to November 2014, according to ABSA. However when adjusted for inflation, the average house price increased only 2.8%. Yet this was an improvement on the 3.2% y-o-y rise in house prices (-2% decline in real terms) during the same period last year.

The house price index for small-sized houses rose by 11.4% (5.3% in real terms) y-o-y in November 2014. The large-sized houses index increased 6.2% (0.4% in real terms).

During the housing boom (from 2000 to 2006), house prices rose by an average of 20% annually. Riding on the back of an empowered middle class, house price rises peaked in October 2004 with 35.7% annual growth (32.5% in real terms). However in Q1 2008 the boom ground to a halt, following the global financial crisis.

In 2008, house prices fell by 0.5% (-9% in real terms)

In 2009, house prices rose 0.3% (-5.4% in real terms)

In 2010, house prices increased by 2.3% (-1% in real terms), encouraged by South Africa hosting the 19th FIFA World Cup

In 2011, house prices rose by just 1% (-5. 1% in real terms), due to lower economic growth, rising inflation, and political corruption concerns

In 2012, the housing market bounced back with house prices rising by 9% (3.2% in real terms)

In 2013, house prices rose by 3.9% (-1.3% in real terms)

In November 2014:

the average price of small homes (80-140 sq. m) was ZAR852,000 (US$73,710)

the average price of medium-sized homes (141-220 sq. m) was ZAR1,191,000 (US$103,038)

the average price of large homes (221-400 sq. m) was ZAR1,814,000 (US$156,937)

“In view of the…house price growth in the first eleven months of the year, nominal price growth of around 9% is forecast for the full year. The expectation is for house prices to rise by a nominal 7.5% in 2015, with real price growth to come in at about 2%,” says ABSA.

Foreigners can own immovable property in South Africa without restriction. However, all foreign funds remitted to the country must be declared and documented. The property must also be endorsed ‘non-resident’, as a condition for repatriation of funds.

Non-resident investors have to pay Capital Gains Tax when they later sell their properties. The purchaser of the property is required to deduct a prescribed percentage from the proceeds of the sale and remit it directly to the South African Revenue Service before paying the balance to the seller.

South Africa's economy was estimated to have grown by just 1.4% in 2014, after growth of 1.9% in 2013, 2.5% in 2012, 3.6% in 2011, and 3.1% in 2010, according to the IMF.

Johannesburg is the financial and economic centre of South Africa. Gross rental yields, i.e., the gross rental return on a property if fully rented out, on Johannesburg apartments are very good, ranging from 9.99% to 11.32%. Three and four- bedroom houses in Johannesburg earn moderate to good rental yields of around 5.45%.

The most desirable neighborhoods in Johannesburg are in the north of the city, including suburbs like Dunkeld, Hyde Park, Houghton, Illovo, Inanda, Melrose, Parkhurst, Parktown, Parkview, Sandhurst, Saxonwold and Westcliff. Nelson Mandela has a house in Houghton.

A two-bedroom apartment in the northern suburbs of Johannesburg will cost around USD 234,000, while a three-bedroom apartment costs around USD 315,000. Renting an apartment in Johannesburg, on average, costs somewhere between USD 1,800 to USD 2,400 per month, depending on whether it has 2 or 3 bedrooms.

Renting a house in Johannesburg costs about the same as in Cape Town. In both cities, to rent a three-bedroom house costs around USD 2,900 per month.

In Cape Town the situation is completely different as regards return on investment. True, Cape Town is the most popular tourist destination in Africa. Its amazing beaches and weather are ideal for retirees and foreign property buyers. Atlantic Seaboard properties are among the most sought-after because of the beaches and cliffs – upscale neighbourhoods like Bakoven, Bantry Bay, Camps, Clifton, Fresnaye, Green Point and Mouille Point. Some houses nestled on cliffs have sweeping views of the Atlantic Ocean. City Bowl, which includes the central business district of Cape Town, is another upscale residential suburb. It is one of the most stable residential markets in Cape Town, because of its prime central location and vibrant cosmopolitan lifestyle.

But apartments and houses in Cape Town return relatively poor rental yields, ranging from 4.08% to 6.38% for apartments, and 3.91% to 4.05% for houses. A 120 sq. m. apartment located in any of these neighborhoods will cost around USD 490,000 to buy. A bigger apartment, say of 300 sq. m., will cost nearly one and a half million US dollars.

Renting a Cape Town apartment will cost from around USD 15 to USD 19 per sq. m. per month, i.e., a 120 sq. m. apartment costs around USD 2,200 per month, and a 300 sq. m. apartment costs around USD 4,890 per month.

So the moral is simple – own a property in Johannesburg, especially an apartment - you'll earn good returns when you let it out. But if you visit Cape Town, you might consider renting rather than buying.

Capital Gains:Capital Gains Tax (CGT) (CGT) is calculated by adding 33.30% of the capital gain to the individual’s income for that year, and taxing that income at the individual’s marginal rate of income tax.

Inheritance: Estate duty on inheritance is levied at 20% of the dutiable amount of the estate. Dutiable amount is equal to the value of the estate less ZAR3,500,000 (US$325,581).

Residents:Residents are taxed on their worldwide income at progressive rates, from 18% to 40%.

Total roundtrip buying costs are between 8.9% and 24.35%, inclusive of the 7.5% estate agent’s commission (plus 14% VAT). Seven procedures are involved in registering a property transfer, completed in about 22 to 30 days.

Rents: The passage of the Rental Housing Act [No.50 of 1999] marked the end of rent control which had been in place since 1976. This paved the way for the entry of investors to the buy-to-let industry.

Rent Tribunal: If the tenant feels that the rent is too much, he can file a protest with the Rent Tribunal. However, only three of the nine provinces have established such tribunals, to the advantage of landlords.

The current pace of growth will not be enough to reduce unemployment. South Africa had real GDP growth of just 1.4% in the third quarter of 2014, an improvement from the meager growth of 0.5% in Q2 2014 and a contraction of 1.6% in Q1 2014 but far lower than the robust 5.1% growth seen in Q4 2013, based on figures from Statistics South Africa.

In September 2014, unemployment stood at 25.4% (Statistics South Africa). From 2000 to 2012 average unemployment was persistently high, at 25%, according to the IMF.

To cut the high jobless rate to 14% by 2020, real GDP would need to grow an annual average of 5.4%, according to the government’s National Development Plan. However, this is unlikely to happen.

The South African economy was estimated to have grown by just 1.4% in 2014, after expanding by 1.9% in 2013, 2.5% in 2012, 3.6% in 2011, and 3.1% in 2010, according to the IMF.

Average monthly nominal earnings increased 4.6% in May 2014 from a year earlier, to ZAR 15,169 (US$1,312). In contrast, monthly real earnings actually dropped 1.93% over the same period, to an average of ZAR6,874 (US$595).

South Africa is Africa’s biggest economy, with an estimated population of 53.7 million and a GDP per capita of US$6,354 in 2014. It has formidable manufacturing and financial sectors. It is the world’s largest exporter of gold and platinum. Tourism is also a key source of foreign exchange.

Jacob Zuma – a worrying figure

ANC leader Jacob Zuma became president of South Africa in 2009, despite corruption charges. Zuma is an economic leftist who supports wealth redistribution, but has assured foreign investors that their interests will be protected. Corruption charges persist unabated. He has been more critical of Zimbabwe's dictator Robert Mugabe than was his predecessor Thabo Mbeki. Zuma is a polygamist who has married 6 times and is reported to have 20 children, including one "love-child".

He has pledged to create 5 million jobs by 2020, but that target looks increasingly unrealistic.

Critics claim that Zuma is indecisive, appeases factions within the party, while safeguarding his own position. Yet African National Congress support seems only to fall slightly, and in the recent elections the A NC vote (65.9%) crushed the liberal Democratic Alliance (16.66%) and the newly-formed radical leftist Economic Freedom Fighters (6.35%).

Populist measures are not out of the question. Zuma told a ruling-party rally in the northern town of Polokwane in January 2014 that foreigners might face restrictions on buying landed property, and be limited to leasing land. Foreigners can now own immovable property without restriction.

Land redistribution is an ongoing issue. Farmland is still mostly white-owned. Officials have signalled that large-scale expropriation is on the cards, with the government aiming to transfer 30% of farmland to black South Africans.

High yields for luxury units

Pro-landlord rental market

Moderate transaction costs

Strong rental market with economy

Moderate to high income tax rates

RESIDENTIAL PROPERTY FACTS

Price (sq.m):
$4,101 For a 120 sq. m. property, usually an apartment.

Rental Yield:
5.45% For a 120 sq. m. property, usually an apartment.

Rent/month:
$2,236 For a 120 sq. m. property.

Income Tax:
7.23% Assumptions: Owners are a non-resident couple drawing US$ / €1,500 per month in rent, with no other local income.

Roundtrip Cost:
16.63% The total cost of buying and then reselling an apartment. Includes: